Multi-managers are under pressure again. They had a difficult credit crunch and now are having an even worse eurozone crisis.

The multi-manager label covers two investment strategies: funds of funds and managers of managers. Funds of funds invest with other funds. Managers of manager funds tend not to invest in established funds, but hire managers to run separate parts of the portfolio.

Both are trying to gain an edge in the markets, which would allow them to outperform more traditional funds – and their fees are priced to reflect that potential. The latest comparable figures from Lipper show the total expense ratio for multi-managers in 2009 was 1.84%, compared with 1.65% for the average fund.

Few paid much attention to fees in the six years when multi-managers were all the rage.
According to data provider Cerulli Associates, between 2002 and 2008 assets grew from $326bn to $2.9 trillion. But this month, assets totalled just $1.9 trillion, according to data from Morningstar.

Managers of managers have suffered net outflows for almost three years. In the UK alone, £2.7bn has walked out the door of UK multi-managers since the beginning of 2009, compared with £13.6bn of inflows for UK fund of funds, according to data from Lipper.

Picking the right manager in a falling market makes investment decisions even harder. In the year to November 10, the FTSE 100 has fallen 6.13%, the MSCI World index is down 6.21%, the MSCI Emerging Market is down 15%, the S&P 500 is flat, and the Barclays Aggregate Bond index is up 2%.

Global multi-managers have had mixed results, returning a cumulative 36.9% over three years, compared with the ABI Mixed Investment 40%-85% Shares benchmark, which is up 34.9%. But over one year the funds are down 4.9%, compared with a fall of 2.71% for the benchmark.

Although the eurozone sovereign debt crisis has ravaged global markets, the poor performance over the past year has echoes of 2008, when high asset correlations destroyed the portfolios of unwary managers.

Hutchins said: “We all overpromised as an industry that we can all outperform in down markets. I think that is nonsense, frankly.”

Simon Wood, co-head of the multi-manager team at Scottish Widows Investment Partnership, one of the best performing multi-managers, said: “When there are times of real market stress, everything goes down. It is only when the markets calm a bit you tend to see some of the markets we like start to outperform.”

Binary view

An HSBC study published last November entitled Risk on – Risk off, said that the directions of different asset classes are more closely related since the credit crunch.

It said: “Correlations between financial asset returns have intensified since the onset of the credit crisis and now nearly all assets are driven by a single, binary recovery factor. The market either believes that we are on the road to recovery – risk on; or that we are not – risk off.”

In times of economic strife, according to HSBC, either everything goes up, or everything goes down.
The report said: “The search for relative value in markets is much harder as returns are dominated by a single factor rather than by the nuances of individual market dynamics.”

This poses a problem for multi-managers, whose strategy, in part, is to diversify risk among a number of managers.

Some are adapting to the new herd instinct. Jim Smigiel, managing director and head of SEI’s Portfolio Strategies Group, said: “It is a difficult problem to solve. We are looking at asset allocation based on volatility, and not allocating based on capital, your classic type of portfolio, 60% in shares, 40% in bonds.

If we look at that on a risk perspective it is more along the lines of 90% risk on, 10% risk off. It is not the fact that diversification failed, it’s more of the case that clients didn’t have any.”

But despite multi-managers’ adaptation to the new high correlation world, they continue to charge high fees.

Wood said: “We get clobbered by the fee story, and when returns are low, it magnifies the problem even more.”

Aidan Kearney, co-head of multi-manager funds at Aberdeen Asset Management, added: “One finger that gets pointed at the multi-manager world is one of cost. Nobody will dispute the fact that the costs are higher.”

This summer, Aberdeen launched a product where the annual management charge fell from 1.5 basis points to 1.25bp. Kearney added: “I think there is an awareness of cost, and there is nothing like open competition to decrease costs over time.”

Although assets under management are down, multi-managers insist that they are not out of the game.
Hutchins said: “Pension funds are into other things, be they diversified growth funds, be it fiduciary management, be it implemented consulting. I think multi-manager is perhaps out of fashion, but people are essentially buying it under a new banner.”

For some, no matter how they are branded, multi-managers will never be a good choice for investors.
Christopher Aldous, chief executive of Evercore Pan Asset, said: “It all comes down to cost. Unless you really believe that a fund manager is going to outperform the average over the long term, and I don’t think anybody will, ultimately you come back to the cost, and with multi-managers you have an awful lot of cost built in there.”